HOW TO IMPROVE CASH FLOW IN YOUR SMALL BUSINESS

Cash is king is a well-known saying in business but what exactly does this really mean? Well, businesses fail in the long term through lack of profit, but they go bust in the short term because they don’t have enough cash in the bank to pay their bills. Think of George Bailey in It's a Wonderful Life who could certainly have used some help to improve cash flow when his Uncle Billy lost $8,000 on the way to the bank.

Cash flow is the life blood of any business. More firms go under because of cash flow problems than any other reason. In fact 50% of profitable business go out of business due to cash flow problems according to Dean of Kemmy Business School, Dr Philip O'Regan. The principles of good cash flow management are actually very straightforward. Here are my top ten tips to improve cash flow in your business.

1. Prepare and Maintain An Up To Date Cash Flow Forecast

Preparing and maintaining a Cash Flow Forecast to project your income and expenditure over the financial year will help you to gauge whether there is enough money coming in to your business to (a) pay your bills (b) invest in growing your business (c) generate a healthy profit and (d) pay you the level of income you deserve. It will only take a few minutes to update each week, but be assured that you will sleep easier at night.

Does my business have enough cash to meet its bills for the next three months?

What expenses can I reduce, and which ones are essential to the business?

How will I plan for my cash needs during lean months of the year, when perhaps there are seasonal variations?

When is the best time to apply for a credit line and how will I manage this?

Use your answers to decide what you need to do differently to ensure your business is profitable and has enough cash in the bank to pay its bills for at least the next three months.

[callout]I'm hosting a FREE Masterclass, The Cash Flow Roller Coaster: How to Retain Financial Control of Your Business on Thursday, 4th August at 8pm. Registration is free, but these slots will fill up fast. Book your place HERE[/callout]

3. Set Aside A Contingency Fund

A contingency fund is a reserve of money set aside to cover possible unforeseen future expenses for example late payment of invoices, breakdown of equipment, illness etc. The size of your contingency fund will depend on your payment terms with clients but you should aim for it to exceed three months of expenditure. If your payment terms are 30, 60 or even 90 days, then you’ll want a much larger contingency fund to ensure that your business can continue to trade if bills are settled late. The smaller your contingency fund, the greater the risk to your cash flow and business.

4. Set Up A Separate Business Savings Account

Operate two business bank accounts, one for the day-to-day running of your business and a second to house your contingency fund, your taxes, as well as any other money you are setting aside to invest in your business e.g. new equipment, marketing etc.

5. Agree Clear Payment Terms With Your Customers

Establishing clear payment terms with your customers from the outset is important so that you know exactly when a payment is overdue. State your payment terms visibly and clearly rather than leave it up to the customer to decide when your invoice should be paid.

Being polite really does matter! A simple “please pay your invoice within” or “thank you for your business” can increase the percentage of invoices that are paid by more than 5%. Here’s a sample wording you can use on your invoices:

“Thank you; we really appreciate your business. Please send payment within 7 days of the date of this invoice.”

6. Invoice Promptly

Some factors that influence cash flow are in your own hands so invoice clients as soon as work is completed. Not doing so can make your business look indifferent to getting paid! If you wait two weeks after the work has been completed before you invoice, don’t be surprised if it takes a further two weeks before that cash arrives in your bank account. Issuing your invoice by email means your customer will receive it immediately and you will have a record of it being sent.

Making payments should be made as easy as possible for your customer. Try to avoid being paid by cheque as this will result in delays before the money arrives in your bank account. Online or card payments are a much better option, and many of these like Paypal and Stripe will integrate with your bookkeeping software.

8. Take Partial Payment In Advance

If it's sensible in terms of the price for your services, ask for a deposit or retainer up front. This is an increasingly common business practice for higher-ticket items and services especially if you need to purchase materials to start the job. No reasonable customer should be offended by such a request.

For example, you might charge a percentage of the projected bill or a set amount as a retainer before you start work on a project with the remainder due on completion of the task. Or break the bill into thirds, asking for a third before work starts, a third halfway through the project and a third upon completion. The beauty of partial payment is that it ensures that you get paid something even if the customer or client defaults on the rest of the bill.

9. Establish A Follow Up Procedure For Customers Who Miss Payments

The quicker you follow up a late payment, the better your chance of getting paid. So set up a system for flagging late payments and a standard procedure for contacting the customer or client when his or her payment is late.

Typically, such a procedure starts with a phone call to the customer on the first day the payment is overdue. This is followed by an email reminder simply stating the bill is overdue and requesting the customer's immediate attention to the matter. It then moves through a series of collection letters expressing increasing concern. If there is no response to these letters, you are left with choosing between writing off the bill as a bad debt, asking a litigation solicitor to deal with the matter on your behalf or turning the account over to a collection agency.

[shareable cite="Denyse Whillier"]Have you set up a process for flagging up and contacting customers if payments are late?[/shareable]

Nowadays there are many channels that you can use to contact the customer. However, some are more effective than others. I recommend starting out with a friendly and polite phone call to "touch base" with the customer or client. Sometimes the person has just forgotten or missed seeing a bill and a quick phone call is all it takes – meaning you get paid and you don’t have to go through any of the rest of the collections procedure. Sending out a late payment letter by email means it will get there immediately and you will have a record of it being sent.

10. Use Technology To Manage Your Accounts

Technology makes it much easier to manage your accounts thanks to cloud-based accounting software like Xero which is my preferred bookkeeping system. Not only can you create invoices on these systems, but you don’t have to worry about backing up your financial data. You can view your accounts on the move via my laptop, tablet or mobile phone. Your bookkeeper can have access to these systems so that they can input data for you and your accountant can use this information to prepare your tax returns and annual accounts.

[callout]I'm hosting a FREE Masterclass, The Cash Flow Roller Coaster: How to Retain Financial Control of Your Business on Thursday, 4th August at 8pm. Registration is free, but these slots will fill up fast. Book your place HERE[/callout]

Join the Conversation

Question: Do you have any tips on how to improve cash flow in your business? As always, I love to hear your thoughts, so please let me know in the comments box below.

About Denyse Whillier

Prior to becoming a business consultant and coach, I gained 25 years’ experience in business, including 8 years as a former CEO. This experience is backed up by training at Cranfield School of Management, the UK’s leading business school. With experience in business planning, financial management, risk management, building strategic partnerships, product development, marketing (including PR) plus leading and developing staff teams of up to 150 people, there’s very little I haven’t had to deal with or experienced in business.

To find out more about the different ways of working with me, click HERE. If you’re already familiar with my work and would like to discuss how I can help you grow your business, book a 45 minute informal Skype coffee chat using this link. There’s no hard sell. Just solid advice and a straightforward, honest assessment of whether 1:1 business coaching or business consultancy would be a good fit for your business, the results you can expect and how to get started.

I offer a small number of FREE 15 minute power sessions each week where you can get my help. Click here to book. I also host a FREE private Facebook group, Business Champions.